Cash runway is the amount of time a business can last without getting an influx of capital. Knowing how to calculate your company's runway could help you from running out of money.
For many startups, funding is not a guarantee for success, as seen in the case of Fast, which raised $100 million, yet folded up. Our in-depth analysis of Fast's rise and fall shows that financial mismanagement was at the core of the company's failure. Knowing and working with their cash runway could have saved Fast from its demise.
The term cash runway means the time your business will remain solvent before depleting all cash reserves before needing to raise external funding.
Let's take an example; You are running an early-stage startup, and based on your calculations, you might say that you have a cash runway until the end of 2023. This shows that until the defined date, you would be able to keep the lights on, but after that, you would need a cash infusion.
Working in a business is like a rollercoaster ride, especially when running a startup. This is why you should know whether your business is stable or overspending. Being too lenient and not caring about the runway can lead you down the hill, and we know nobody would want that!
Many startup founders know that a short runway is indicative they should go for additional funding options or try to cut some unnecessary spending. However, if you have already received additional funding, even then, the cash runway is important as investors use it to track your profitability and growth.
This might be the first question that came to your mind after learning what cash runway is. The adequate cash runway amount depends on how you manage the cash.
Your main aim should be to boost profits with the current resources because your business might be breathing its last breath if you don't have enough revenue to cover the necessary expenses.
Generally, for startups, if the cash runway is two months or less, that's a bad sign. You can even keep the real-time measurement of the cash runway to stay stress-free and streamlined.
Calculating your cash runway is not possible if you don't know the monthly burn rate. Burn rate is the pace of a company's expenditure. It is mainly calculated monthly but can be adjusted based on any period.
The burn rates are of two types-
For example, If you earn $4,000 every month and spend $10,000, your Gross burn rate will be $10,000. On the other hand, your Net burn rate is $6,000.
Now that you know the burn rate, you can quickly to calculate your cash runway. The formula for cash runway is:
To make it easier for you, here's an example; if a company has $50 million in the bank and its burn rate is $10 million per month, the cash runway period is five months before the company goes broke.
A business uses its cash flow in multiple ways, and to get the most out of the runway cash flow formula, you must understand the difference between them.
There are majorly three areas of a company's cash flow:
Most businesses use company cash to calculate the cash runway, and they don't need to touch the team cash or founder cash, but still, if such a situation arrives, you can choose to pay employees with equity & non-cash incentives. Founder cash can also be used to save the company at the last moment.
Previously, raising additional funds was considered the most common way to improve your cash runway. But in present times, getting additional funding is complicated.
To be in a better position, you need other strategies. The following ways can help you with that:
Ideally, you should aim for a runway of around 18 months.
